Asia Credit Research. Earnings Review: OUE Ltd ( OUE )

Transcription

1 Asia Credit Research 10 September 2018 Earnings Review: OUE Ltd ( OUE ) Issuer Profile: Neutral (4) Ticker: OUESP Background Incorporated in 1964, OUE Ltd ( OUE ) is a real estate developer and landlord with a real estate portfolio located at prime locations in Singapore (such as Orchard Road) and across the region. The group has diverse exposure across the office, hospitality, retail and residential property segments. OUE has also recently entered the healthcare segment. OUE is the sponsor and holds a significant stake in both OUE-Hospitality Trust ( OUE-HT ) and OUE Commercial REIT ( OUE-CT ). OUE is 68.6%-owned by the Lippo Group. Ezien Hoo, CFA EzienHoo@ocbc.com Recommendation OUE has been absent from the recent property wave with the lack of new projects launched though it continues to generate a stable income stream from its Investment Properties business. OUE s continues to have a considerable asset base, supported by its stakes in OUE-CT, OUE-HT, Gemdale Properties and Investments (a China-focused real estate developer) and directly owned OUE Downtown and US Bank Tower. This helps offset the introduction of potential counterparty credit risk to the company. OUE Lippo Healthcare continues to drag bottom line though the recent introduction of Itochu as a strategic shareholder is a credit positive while OUE s new convertible and exchangeable bond issuances indicate continued strong access to capital markets. We are largely neutral the OUESP curve though we prefer OUESP s shorter dated OUESP 20s over GuocoLand Ltd s GUOLSP 19s, GUOLSP 20s and GUOLSP 21s. The OUESP 20s trades at an ask YTW of 3.41% (145 bps) and a switch from the GUOLSP 20s will allow a spread pick up of 30 bps. For a one year longer tenure, the OUESP 20s provide a 70 bps spread pick up against the GUOLSP 19s. We hold OUESP at an issuer profile of Neutral (4) though we may relook this should counterparty credit risk increases. We hold GUOLSP at an issuer profile of Neutral (5). Relative Value: Bond Maturity date/ Reset Date Net gearing Ask Yield to Worst Spread OUESP 3.8% 20 15/04/ x 3.41% 145bps OUESP 3.75% 22 17/04/ x 3.63% 148bps OUESP 3.55% 23 10/05/ x 3.68% 146bps GUOLSP 3.95% 19 01/04/ x 2.48% 72bps GUOLSP 4.1% 20 13/05/ x 3.10% 114bps GUOLSP 3.62% 21 30/03/ x 3.41% 135bps GUOLSP 4.0% 22 31/01/ x 3.63% 149bps GUOLSP 3.85% 23 15/02/ x 3.79% 158bps Indicative prices as at 10 September 2018 Source: Bloomberg, OCBC, Company Note: (1) We think there is a reasonable chance for OUESP 4.25% 19c18 to be called in October 2018 as issuer is likely able to replace this with lower cost debt funding Key Considerations Beyond property development: Revenue at OUE declined 19.6% y/y in 2Q2018 to SGD150.7mn, mainly due to the absence of Development Property revenue in 2Q2018 (1Q2018: SGD55.2mn of Development Property revenue was recognised). OUE owns land at 28 Nassim Road though there are no new property development projects in the pipeline. OUE Twin Peaks had been fully sold, including those sold under its deferred payment schemes. Revenue from properties sold via the scheme would only be recognised (estimated at ~SGD450mn) when these properties are legally handed over to buyers, with accompanying cash collection at that point. We expect 80% remains to be collected since 20% was paid as downpayment. In 2Q2018, OUE started recognizing Dividend Income (SGD12.6mn) in its top line from 14.8%-owned Gemdale Properties & Investment ( Gemdale ) while previously the share of profit from JV in Gemdale was recognized - On May 2018, OUE had terminated the joint venture with Epoch Thrive Limited (the other JV partner) and started recognizing its stake in Gemdale as a financial asset instead. Asset coverage manageable though new counterparty credit risk introduced: Development Property income historically generated ~10% in net profit margin versus the large pass-through from Investment Property revenue Treasury Research & Strategy 1

2 and Dividend Income into earnings line. Despite the fall in top line, EBITDA margins were higher in 2Q2018 at 32% (21% in 1Q2018). EBITDA (based on our calculation which does not include other income and other expenses) was higher at SGD48.7mn (2Q2017: SGD38.5mn). Interest expense though had increased 13.2% due to higher levels of average borrowing and a higher net foreign exchange loss, with resultant EBITDA/Interest coverage of 1.3x against 1.2x in 2Q2017. As at 30 June 2018, unadjusted net gearing was 0.67x, slightly higher versus 0.65x as at 31 March Taking only assets we think can be monetiseable in a quicker fashion (cash, equity investments, development and investment properties), we find debt-to-asset coverage at OUE manageable at 0.47x. We do not include SGD241.3mn in assets held for sale in our calculation. This asset held for sale relates to PT Alpha Sentra Prima group of entities ( PT Alpha ), a subsidiary of OUE, though we are unable to ascertain the detailed nature of PT Alpha s assets from publicly available information. PT Alpha is being sold to two Indonesian-based purchasers, of which one of them has various on-going business relationships with the broader Lippo Karawaci group. It was shared that OUE had earlier extended ~SGD228.9mn in shareholder s loan to PT Alpha. Post transaction, these loans will be novated to one of the purchasers. In our view, OUE will in effect be a lender and hold a promissory note issued by purchaser with purchaser obliged to repay the sums. Investment Properties as a key credit driver: Investment properties at OUE is mainly derived from OUE-CT ((Issuer profile: Unrated) which OUE has a 55.7%- ownership stake. OUE-CT s financials is consolidated into OUE and OUE-CT contributes two-thirds of Investment Properties revenue. Other Investment Properties held outside OUE-CT include OUE Downtown (OUE Downtown 1 and 2, Downtown Gallery, Oakwood Serviced Apartments), the US Bank Tower in Los Angeles, 23 residential units at OUE Twin Peak and healthcare assets at OUE Lippo Healthcare Ltd ( OUE-LH, Issuer profile: Unrated). Overall Investment Properties revenue increased 4.2% y/y to SGD69.8mn, driven by the increase in full quarter rental contribution from Downtown Gallery (retail mall in Shenton Way opened in May 2017). On a q/q basis which removes the timing impact of Downtown Gallery s opening, overall investment properties revenue was up slightly by 0.4% q/q. For OUE-CT specifically, revenue declined 2.6% y/y to SGD43.1mn on the back of lower retail revenue from One Raffles Place Shopping Mall (H&M an anchor tenant had left). Finance costs increased by 9% y/y to SGD12.3mn from higher level of average debt, which drove total return after tax lower by 10% y/y to SGD15.3mn. As at 30 June 2018, total debt at OUE-CT totalled SGD1.4bn on investment properties of SGD3.5bn. This leaves an asset buffer of SGD2.1bn, of which, after removing minority investor claims, SGD1.7bn is attributable to OUE. Additionally, OUE Downtown was valued at SGD1.59bn while US Bank Tower was valued at USD605mn (~SGD823mn) in end-december Investment Properties asset base looks to provide sufficient buffer against OUE s standalone debt (taking away debt at OUE-CT and OUE-LH) which we estimate at SGD1.9bn. Hospitality segment is the second revenue driver: OUE manages hospitality assets in Singapore and Malaysia. In 2Q2018, the Hospitality segment contributed SGD54.0mn in revenue (up 11.1% y/y) led by full quarter contribution from Oakwood Premier OUE Singapore serviced apartments which opened in June It is also the master lessee and hotel manager of Mandarin Orchard Singapore and Crowne Plaza Changi Airport ( CPCA ) owned by OUE-HT (Issuer profile: Unrated). OUE owns 590mn of stapled securities in OUE-HT, representing a 32.4%-ownership, which OUE-HT recorded as an associate. In end-2017, non-cancellable lease obligations (an off-balance sheet liability) borne by OUE on such master leases amounted to SGD710.3mn. Mitigating the risk with this off-balance sheet liability, the two hotel assets are quality properties. Our colleagues at OCBC Investment Research have observed Mandarin Orchard Singapore outperforming its peers against industry operating statistics. OUE Healthcare drags bottom line though balance sheet has strengthened with new capital: In 2Q2018, revenue from the Healthcare segment declined 15.3% y/y to SGD9.5mn mainly due to lower revenue from OUE-LH s 163-bed Treasury Research & Strategy 2

3 Wuxi New District Phoenix Hospital in China and the China pharmaceutical distribution business. Additionally, while rental revenue from Japan nursing homes had stayed stable, in SGD terms this had deteriorated. Overall, the OUE- LH business continues to be loss-making, with EBITDA of only SGD0.2mn and losses after tax of SGD2.9mn in 2Q2018 (1Q2018: losses after tax of SGD2.7mn). In January 2018, Itochu, a major sogo shosha took a strategic stake amounting to SGD78.8mn in OUE-LH by subscribing into new shares issued. This provides the business with cash infusion that will go towards working capital and growth purposes (eg: planned Chengdu hospital and KLCC integrated development project with specialist medical suites). Post transaction, OUE holds 64.4%-stake in OUE-LH while Itochu is now the second largest shareholder holding 25.3%. As at 30 June 2018, net gearing at OUE-LH was high at 2.1x though had declined from 8.2x in end Tapping alternative sources of funding: In April 2018, OUE issued a SGD154.75mn convertible bond that are convertible into new shares of the listed OUE holding company. Another SGD150.0mn in exchangeable bond ( EB ) that is exchangeable into existing stapled securities of OUE-HT (rather than new stapled securities) was also issued at the same time. The use of an EB means that if OUE is unable to deliver the stapled securities when requested by EB holders, this constitutes an event of default. Net-net, OUE has sold a call option on 158.5mn OUE-HT stapled securities based on the current adjusted exchange price. As of report date both the CB and EB are unlikely to be converted / exchanged into shares. Refinancing risk has declined: As at 30 June 2018, consolidated short term debt at OUE was SGD1.3bn. SGD0.5bn (or 38% of the short-term debt) relates to OUE-CT and in August 2018, OUE-CT had fully refinanced these. SGD0.2bn will come due in 4Q2018; we think this relates to OUE-LH with bulk being secured debt. The remaining SGD0.6bn will come due in 1Q2019. In aggregate the remaining short-term debt amounts to SGD0.8bn and makes up 22% of total debt. In our view, OUE should be able to refinance its remaining short-term debt given the sufficient asset coverage. Treasury Advisory Corporate FX & Structured Products Tel: / 1881 Interest Rate Derivatives Tel: Investments & Structured Products Tel: GT Institutional Sales Tel: OCBC Global Treasury Credit Research Andrew Wong WongVKAM@ocbc.com Ezien Hoo, CFA EzienHoo@ocbc.com Wong Hong Wei, CFA wonghongwei@ocbc.com Seow Zhi Qi ZhiQiSeow@ocbc.com Treasury Research & Strategy 3

4 Explanation of Issuer Profile Rating ( IPR ) / Issuer Profile Score ( IPS ) Positive ( Pos ) The issuer s credit profile is either strong on an absolute basis, or expected to improve to a strong position over the next six months. Neutral ( N ) The issuer s credit profile is fair on an absolute basis, or expected to improve / deteriorate to a fair level over the next six months. Negative ( Neg ) The issuer s credit profile is either weaker or highly geared on an absolute basis, or expected to deteriorate to a weak or highly geared position over the next six months. To better differentiate relative credit quality of the issuers under our coverage, we have further sub-divided our Issuer Profile Ratings ( IPR ) into a 7 point Issuer Profile Score ( IPS ) scale. Explanation of Bond Recommendation Overweight ( OW ) The performance of the issuer s specific bond is expected to outperform the issuer s other bonds, or the bonds of other issuers either operating in the same sector or in a different sector but with similar tenor over the next six months. Neutral ( N ) The performance of the issuer s specific bond is expected to perform in line with the issuer s other bonds, or the bonds of other issuers either operating in the same sector or in a different sector but with similar tenor over the next six months. Underweight ( UW ) The performance of the issuer s specific bond is expected to underperform the issuer s other bonds, or the bonds of other issuers either operating in the same sector or in a different sector but with similar tenor over the next six months. Other Suspension We may suspend our issuer rating and bond level recommendation on specific issuers from time to time when OCBC is engaged in other business activities with the issuer. Examples of such activities include acting as a joint lead manager or book runner in a new issue or as an agent in a consent solicitation exercise. We will resume our coverage once these activities are completed. Withdrawal ( WD ) We may withdraw our issuer rating and bond level recommendation on specific issuers from time to time when corporate actions are announced but the outcome of these actions are highly uncertain. We will resume our coverage once there is sufficient clarity in our view on the impact of the proposed action. Analyst Declaration The analyst(s) who wrote this report and/or her or his respective connected persons did not hold securities in the above-mentioned issuer or company as at the time of the publication of this report. Disclaimer for research report This publication is solely for information purposes only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our prior written consent. This publication should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities/instruments mentioned herein. Any forecast on the economy, stock market, bond market and economic trends of the markets provided is not necessarily indicative of the future or likely performance of the securities/instruments. Whilst the information contained herein has been compiled from sources believed to be reliable and we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee and we make no representation as to its accuracy or completeness, and you should not act on it without first independently verifying its contents. The securities/instruments mentioned in this publication may not be suitable for investment by all investors. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. This publication may cover a wide range of topics and is not intended to be a comprehensive study or to provide any recommendation or advice on personal Treasury Research & Strategy 4

5 investing or financial planning. Accordingly, they should not be relied on or treated as a substitute for specific advice concerning individual situations. Please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. OCBC and/or its related and affiliated corporations may at any time make markets in the securities/instruments mentioned in this publication and together with their respective directors and officers, may have or take positions in the securities/instruments mentioned in this publication and may be engaged in purchasing or selling the same for themselves or their clients, and may also perform or seek to perform broking and other investment or securitiesrelated services for the corporations whose securities are mentioned in this publication as well as other parties generally. This report is intended for your sole use and information. By accepting this report, you agree that you shall not share, communicate, distribute, deliver a copy of or otherwise disclose in any way all or any part of this report or any information contained herein (such report, part thereof and information, Relevant Materials ) to any person or entity (including, without limitation, any overseas office, affiliate, parent entity, subsidiary entity or related entity) (any such person or entity, a Relevant Entity ) in breach of any law, rule, regulation, guidance or similar. In particular, you agree not to share, communicate, distribute, deliver or otherwise disclose any Relevant Materials to any Relevant Entity that is subject to the Markets in Financial Instruments Directive (2014/65/EU) ( MiFID ) and the EU s Markets in Financial Instruments Regulation (600/2014) ( MiFIR ) (together referred to as MiFID II ), or any part thereof, as implemented in any jurisdiction. No member of the OCBC Group shall be liable or responsible for the compliance by you or any Relevant Entity with any law, rule, regulation, guidance or similar (including, without limitation, MiFID II, as implemented in any jurisdiction). Co.Reg.no.: W Treasury Research & Strategy 5